Millennials are sabotaging their retirement with poor investing moves, study finds

Spooked by last year’s stock swoon, millennials are now derailing their own retirement savings goals with subpar investing decisions, according to a new survey.

Workers between ages 27 and 42 allocated a third of their retirement assets on average to cash last year, according to a survey of 2,000 workers from investment manager Schroders, even though that’s far too conservative for individuals that age, experts say.

The results are a red flag for workers of that generation who estimate they will need $1.3 million for a comfortable retirement, a goal most don’t expect to achieve.

“The average asset allocation for millennials is far too heavy in cash for retirement accounts because of the long time horizon to use the funds,” Russell Gaiser, a CFPA and a financial advisor with Blackridge Asset Management, told Yahoo Finance. “Inflation will eat away at that allocation.”

Best allocation?

In addition to the cash allocation at 33%, millennial workers said the rest of their assets were divided up like this, according to the survey:

  • 31% in equities

  • 16% in fixed income

  • 14% in target-date funds, which often include stocks

  • 6% in other, unspecified assets

That’s way off, said Gaiser, who said the ideal allocation for equities at this age would be 65% to 100%.

“The best asset allocation for 35+ depends on the savings rate, risk tolerance, and retirement income sources,” he said. “An appropriate asset allocation for this age group could still be aggressive, 80% stock, 20% bonds.”

‘Lack of knowledge about the markets’

Traders work on the floor of the New York Stock Exchange on March 3, 2023. - Wall Street stocks rose early Friday, extending a market upswing despite lingering worries about the likelihood of more central bank interest rate hikes. (Photo by TIMOTHY A. CLARY / AFP) (Photo by TIMOTHY A. CLARY/AFP via Getty Images)

Traders work on the floor of the New York Stock Exchange on March 3, 2023. (Photo by TIMOTHY A. CLARY/AFP via Getty Images)

More than 3 in 5 millennials said they were holding cash because they were afraid of losing too much money if stocks went down.

In 2022, the S&P 500 index plunged 19.4%. The average balance of 401(k)s similarly tanked, according to Fidelity, dropping 20.5% to $104,000 in the fourth quarter of 2022 from $130,700 in the same period in 2021. IRA balances also lost 23.3% during that time, declining to $104,000 on average from $135,600.

“There’s a lack of knowledge about the markets. In the short term, it may seem like the right decision. But in the long term, the markets outpace inflation and the cash investments won’t provide returns as high as the markets,” Gaiser said.

Just over a quarter of millennial workers said they changed their asset allocation to become more conservative that year, underscoring the angst the stock market volatility had on some. Almost half of working millennials said the performance of their retirement plan last year caused them anxiety.

“Many older millennials started investing during the 2007-2008 Great Depression. That was a terrifying time,” Joel Schiffman, head of strategic partnerships at Schroders, told Yahoo Finance. “Then they had to deal with the pandemic … there were double-digit market losses. The last 12 to 15 years, millennials had a tough go of it.”

Another reason for the misallocation, according to the survey, was plain ignorance. Almost 2 in 5 (38%) of millennials said they had no idea how their retirement assets were allocated.

‘You may not need to have $1 million’

With so much in cash, millennials likely won’t achieve the comfortable retirement target of $1.3 million they cited in the survey. In fact, only 29% were confident of hitting $1 million before they retire. Nearly two-thirds with workplace retirement plans also worry they’ll fail to grow the assets in those plans to the level they want to achieve.

But both Schiffman and Gaiser said millennials have many options available to them to achieve their goals. They just need to plan.

“You may not need to have $1 million saved for retirement, but you need to create a roadmap to have the retirement that’s right for you,” Gaiser said, noting that these workers should reach out to a financial advisor for help.

In fact, millennials were more likely to say family (38%) or financial websites or publications (23%) gave them the most helpful financial advice than a financial advisor (22%), according to the survey.

“There is a disconnect between young people and financial advisors. There are trust issues where people may trust Google for financial advice more than an advisor,” Gaiser said. “Financial advisors need to approach clients from the heart and not just be focused on business. Meet the clients where they are.”

Schiffman also said that employers can play a role. The survey found 56% of working millennials with retirement plans said they wished their employers would give them more guidance about how to save in their retirement plans.

The bottom line is “millennials need more education and guidance about retirement,” Schiffman said, especially as they face the ups and downs of markets.

“Young people have decades to invest in the stock market and increase their savings.”

Ella Vincent is the personal finance reporter for Yahoo Finance. Follow her on Twitter @bookgirlchicago.

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